MILAN, July 20 (Reuters) - An Italian bank being set up with backing from former Barclays chief Bob Diamond said on Friday it aimed to trounce industry returns by chasing higher-margin borrowers and going digital to keep costs down.

It targets a return on equity (ROE) of about 25 percent in its plans to 2023, compared with just 4 percent for Italian lenders in 2017 net of one-offs and 14 percent at Banca IFIS , a specialty bank which buys and manages bad debts.

“This project is an act of confidence in Italy,” Corrado Passera, the chief executive of the new bank whose name has yet to be announced, told journalists.

The veteran banker and former industry minister said the bank would scout for small businesses seen to have potential but which had trouble securing funds from mainstream lenders. It would also buy bad loans from rivals.

The bank, which will not have branches, aims to tap the expertise of retired corporate executives and use artificial intelligence to identify companies that qualify for lending.

Italian banks are slowly emerging from a bad loan crisis triggered by a deep recession. Credit losses and negative interest rates have hammered returns in the sector, which is weighed down by fragmentation and too many branches.

The number of specialised banks, known as “challenger banks”, seeking to compete with established players has grown in Britain and other countries but they are still rare in Italy.

Passera, who headed Intesa Sanpaolo until 2011, raised 600 million euros ($703 million) in January by listing SPAXS, a special purpose acquisition company that he used to buy small lender Banca Interprovinciale.

Alongside Passera, the chief financial officer will be Francesco Mele who held the same job at Monte dei Paschi di Siena.

The new bank aims to deliver a net profit of 40 million-50 million euros in 2020 rising to about 300 million euros in 2023, broadly split between the small- and medium-sized (SME) enterprises lending unit and the bad loan business.

Andrea Clamer, who has moved from Banca IFIS to head the bad loan unit, said the bank would invest 3 billion euros buying some of the 135 billion euros in bad corporate loans Italian banks were expected to offload in 2018-2023.

The SME unit would also buy so-called “unlikely-to-pay” loans, which are not yet in default and could be recovered by turning around the troubled borrower.

Clamer said the new group had agreed to buy a 300 million euro bad loan portfolio, a deal that would go ahead after Aug. 8 when SPAXS shareholders approve the tie-up with Banca Interprovinciale, which also needs regulatory clearing.

The new bank targets a core capital ratio of more than 15 percent and plans to rely on digital technologies to keep costs below 30 percent of its income.